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US e-commerce tax to stay on hold

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Analysis It looks as though there will be no US e-commerce tax, at least for a few years. The last of four meetings of the Advisory Commission on Electronic Commerce, which is advising Congress, concluded in Dallas this week without publicly reaching overall agreement as to what recommendations to make. ACEC was established by the Internet Tax Freedom Act of 1998 to allow a moratorium on taxes for Internet sales and access. Uniquely, Congress did not vote ACEC any money, so it had to function on "gift authority", which meant that the state of Virginia coughed up initially, and Virginia Governor James Gilmore was made chairman. President Clinton agreed last November to a slender $1.4 million funding for fiscal 2000, with the consequence that ACEC lunches and dinners have to be sponsored. Thirteen votes of ACEC were needed to get agreement, but in the event the voting in Dallas was only 11 to 1, with seven abstentions by federal, state and local officials. Those voting for the proposal were of course mostly the representatives of e-commerce-related industries, the self-styled Business Caucus: AOL, AT&T, Charles Schwab, Gateway, MCI WorldCom, and Time Warner. The lone vote against was by Dallas mayor Ron Kirk, who described the Caucus' suggestions as "a huge money grab". Although it is still possible that there will be last-minute agreement, provision was made for ACEC commissioners to make individual submissions to Congress. There, the matter will be dealt with by the House Commerce Committee, but not with Republican Tom Bililey of Virginia as chairman, since he is retiring. Bililey was however responsible for the electronic signatures bill, although this has currently been delayed by House Democrats. The US Sales Tax entanglement At present, as a result of the moratorium (and a similar moratorium agreed by the World Trade Organisation), Internet purchases do not attract sales tax. Retailers on main street complain that this is grossly unfair, since in 45 states (and DC) they must pay state sales taxes, with many cities also adding their own additional taxes. A third category of sales - through catalogues for example - generally avoid sales tax if the purchaser and vendor are not in the same state. This is clearly an absurd situation, with many potential purchasers getting information and examining goods in a local store, but buying at a lower price via the Internet. The magnitude of the problem needs to be put in context: last quarter, US Internet sales amounted to a little over $5 billion, according to the US Department of Commerce, compared with more than $800 billion in retail sales - around 1.5 per cent. It is generally expected that this will increase up to tenfold in the next ten years. One of the excuses used by the Business Caucus was that there are 7000 to 8000 different tax regimes in the US, so that calculating Internet tax would be difficult. Of course this is not really true, since a small database could easily be set up and the tax rules included. It would be unpopular, but the technical issues have been naturally been exaggerated. Many of the questions that the ACEC is confronting are political: whether all commercial transactions should be taxed equally or not, and whether electronic commerce transactions merit favourable treatment. Of course, e-commerce vendors want to continue the status quo of the moratorium. In the local retailer's favour is the fact that Internet access, shipping costs and delivery delays can be sufficiently daunting to remove some of the advantages of Internet shopping. ACEC has tried to address international issues, but has found the situation too complex for the time allowed, recognising that more information is needed. Despite the setbacks that the US has received with its WTO relationship, the Business Caucus still favours working through the WTO and extending the moratorium - as well as working with the OECD. The inclusion of the OECD looked rather like a fall-back position in case WTO negotiations do not work out. Five more years? All factions at ACEC appear to accept that fundamental federal, state and local tax reform is needed, but are acutely aware that the hurdles to achieve this are very high - not least the length of time it would take. The Business Caucus recommends that Congress extends the current moratorium for a further five years, and encourages the drafting of a Uniform Sales and Use Tax Act by October 2004 for tax simplification, overseen by a new Advisory Commission - a reinvention of itself, it seems. An alternative minority proposal by state and local interests is in effect rather similar: they suggest that the moratorium be extended long enough to allow sales taxes be simplified. A difference was their concern to eliminate the digital divide between the have- and have-nots, so far as Internet access is concerned, and to get more data about the effect of e-commerce on the national economy. There was a sufficient majority supporting the elimination of the three per cent telecommunication excise tax; this was first introduced as a luxury tax in 1898 to raise money for the Spanish-American war. The war of course came to an end in August 1898 with the surrender of Manila, although another war between the Philippines and the US broke out a few months later. The tax continued in force for the world wars, as well as Korea and Vietnam, despite attempts to remove it, until it became permanent in 1990 at 3 per cent. As part of the Revenue Conciliation Act, it now raises more than $5 billion/year. Governor Gilmore is of course very aware of the presence of AOL and NSI on his Virginia patch, so it's no surprise that AOL President Robert Pittman is one of the 19 commissioners. Gilmore introduced his own resolution against the telecommunication tax, as well as his own variant on the Business Caucus proposal. He suggested that there be no sales taxes on business-to-consumer Internet sales, but that business-to-business transactions be taxed. ACEC's final report to Congress is likely to finalised around the end of the month: the deadline imposed by Congress is 21 April. There is still uncertainty about the final outcome, because ACEC members went into private session for most of their time in Dallas. The thrust of the Internet Tax Freedom Act was that Congress thought "the President should seek bilateral, regional and multilateral agreements to remove barriers to global electronic commerce" and that electronic commerce should be free from "tariff and non-tariff barriers; burdensome and discriminatory regulation and standards; and discriminatory taxation". Objections are likely to come from states that are more dependent on sales taxes. ®

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